Question

a.)

Financing Deficit

Garlington Technologies Inc.'s 2019 financial statements are shown below:

Income Statement for December 31, 2019

Sales	$4,000,000
Operating costs	3,200,000
EBIT	$  800,000
Interest	120,000
Pre-tax earnings	$  680,000
Taxes (25%)	170,000
Net income	510,000
Dividends	$  190,000

Balance Sheet as of December 31, 2019

Cash	$   160,000		Accounts payable	$   360,000
Receivables	360,000		Line of credit	0
Inventories	720,000		Accruals	200,000
Total CA	$1,240,000		Total CL	$   560,000
Fixed assets	4,000,000		Long-term bonds	1,000,000
Total Assets	$5,240,000		Common stock	1,100,000
			RE	2,580,000
			Total L&E	$5,240,000

Suppose that in 2020 sales increase to $4.4 million and that 2020 dividends will increase to $216,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 10%. New financing will be with a line of credit. Assume it will be added at the end of the year. Cash does not earn any interest income. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Garlington Technologies Inc. Pro Forma Income Statement December 31, 2020
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (25%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2020
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Line of credit		$
Accruals		$
Total current liabilities		$
LT bonds		$
Common stock		$
Retained earnings		$
Total L&E		$

Answer 1

Garlington Technologies Inc. Pro Forma Income Statement December 31, 2020
Sales	$ 4,400,000
Operating costs(3200,000/4000,000)*4400,000	$ (3,520,000)
EBIT	$ 880,000
Interest (1,000,000*10%)	$ (100,000)
Pre-tax earnings	$ 780,000
Taxes (25%)	$ (195,000)
Net income	$ 585,000
Dividends:	$ 216,000
Addition to RE:	$ 369,000

Note- Assuming Operating cost margin of sales is same as of last year.

Calculating Additional Finance Needed(AFN) using following formula:-

AFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - Retained earnings of forcasted Year

A / S: Assets that change given a change in sales, expressed as a percentage of sales.

Δ = Symbol for Change

ΔSales: Change in sales between the last reporting period and the forecasted sales. ;= (4400,000-4000,000) ;= 400,000

L / S: Liabilities that change given a change in sales, expressed as a percentage of sales.

AFN = [(5240,000/4000,000)* 400,000] - [(560,000/4000,000)*400,000] - 369,000

AFN = 524,000 - 56,000 - 369,000

AFN = 99,000

Since, additional financing is Line of Credit and is added at the end of year, its Interest implication won't be taken as expenses in Forcasted Income Statement as computed above.

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2020
Cash		$ 176,000
Receivables		$ 396000
Inventories		$ 792000
Total current assets		$ 1364,000
Fixed assets		$ 4400,000
Total assets		$ 5764,000
Accounts payable		$ 396,000
Line of credit		$ 99,000
Accruals		$ 220,000
Total current liabilities		$ 715,000
LT bonds		$ 1000,000
Common stock		$ 1100,000
Retained earnings (2,580,000+369,000)		$ 2949,000
Total L&E		$ 5764,000

Change in Items of Assets & Change in items of Current Liability except line of Credit = % Change in fore-casted sales from last year to this year

= [(4400,000-4000,000)/4000,000]100

= 10%

So, Items of Assets & Change in items of Current Liability except line of Credit will be increased by 10% from there last balance as per the requirements of computing Additional finance needed.

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